10QSB 1 deserthealth10qsb.txt DESERT HEALTH PRODUCTS, INC. FORM 10-QSB 9-30-2005 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTS OF 1934 For the quarterly period ended September 30, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACTS OF 1934 For the transition period from to --------------- ------------- Commission File Number: 000-27931 DESERT HEALTH PRODUCTS, INC. (Exact name of registrant as specified in its charter) ARIZONA (State of other jurisdiction of other jurisdiction of incorporation or organization) 86-0699108 (I.R.S. Employer Identification Number) 8221 EAST EVANS ROAD, SCOTTSDALE ARIZONA 85260 (Address of Principal executive office) 480.951.1941 (Registrant's telephone number, including area code) ---------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes No X ----- ----- The number of shares of Common Stock outstanding as of November 10, 2005: 17,608,521 Transitional Small Business Disclosure Format (check one): Yes No X ----- ----- DESERT HEALTH PRODUCTS, INC. CONSOLIDATED STATEMENTS (UNAUDITED) FORM 10QSB INDEX PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): a. Consolidated Balance Sheets as of September 30, 2005, F-1 and December 31, 2004 b. Consolidated Statements of Operations F-2 for the three and nine month period ended September 2005 and 2004 c. Consolidated Statements of Stockholders' Deficit F-3 as of September 30, 2005 and December 31, 2004 d. Consolidated Statements of Cash Flow for the nine months ended F-4 September 30, 2005 and 2004 e. Notes to Unaudited Consolidated Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 4 Item 3. Controls and Procedures 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings 9 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 9 Item 3. Defaults by the Company Upon Its Senior Securities 9 Item 4. Submission of Matters to a Vote of Security Holders 9 Item 5. Other Information 10 Item 6. Exhibits 10 Signatures 10

DESERT HEALTH PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------- ASSETS CURRENT ASSETS Cash $ 3,276 $ 2,135 Accounts receivable, net 186 175 Inventory 80,826 75,141 Prepaids - 7,500 ------------- ------------- Total Current Assets 84,288 84,951 ------------- ------------- PROPERTY AND EQUIPMENT, NET 12,225 64,410 ------------- ------------- OTHER ASSETS Deferred financing costs - 129,122 ------------- ------------- TOTAL ASSETS $ 96,513 $ 278,483 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Bank Overdraft $ 9,667 $ 809 Accounts payable and accrued expenses 730,235 609,212 Advances 194,536 - Loan inducement fees payable 11,340 11,340 Deferred revenue 44,372 26,000 Interest payable 647,590 417,246 Dividends payable 274,387 274,387 Current portion of notes payable 2,356,748 1,935,193 ------------- ------------- Total Current Liabilities 4,268,875 3,274,187 LONG TERM LIABILITIES Shares subject to mandatory redemption 1,100,000 1,100,000 Long term note payable, net of current portion 225,000 225,000 ------------- ------------- TOTAL LIABILITIES 5,593,875 4,599,187 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT Preferred Stock, convertible, $.001 par value, 10,000,000 shares authorized, 3,319,125 and 3,359,125 issued shares and outstanding as of September 30, 2005 and December 31, 2004, respectively Common Stock, $.001 par value, 25,000,000 shares authorized, 20,933,521 and 15,663,821 issued; and 20,508,521 and 15,238,821 outstanding as of September 30, 2005 and December 31, 2004, respectively Stock subscribed 266,940 404,881 Treasury stock, 425,000 shares at cost (191,250) (191,250) Additional paid in capital 10,250,775 8,758,124 Accumulated deficit (15,848,081) (13,311,483) ------------- ------------- TOTAL STOCKHOLDERS' DEFICIT (5,497,362) (4,320,704) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 96,513 $ 278,483 ============= =============

F-1

DESERT HEALTH PRODUCTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 2005 2004 2005 2004 ------------ ------------ ------------ ------------ REVENUES, NET $ 14,694 $ 91,757 $ 99,890 $ 210,571 COST OF REVENUES Merchandise 9,484 59,730 69,222 120,260 ------------ ------------ ------------ ------------ 9,484 59,730 69,222 120,260 ------------ ------------ ------------ ------------ Gross Profit 5,210 32,027 30,668 90,311 OPERATING EXPENSES General and administrative 347,618 354,738 2,004,012 1,335,260 Impairment of intangibles - - - 756,822 Impairment of goodwill - - - 233,645 ------------ ------------ ------------ ------------ Total operating expenses 347,618 354,738 2,004,012 2,325,727 ------------ ------------ ------------ ------------ Net Loss From Operations (342,408) (322,711) (1,973,344) (2,235,416) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest expense (240,839) (191,961) (570,107) (1,026,106) Debt forgiveness 1,853 - 6,853 - Other income - - - 8,653 ------------ ------------ ------------ ------------ (238,986) (191,961) (563,254) (1,017,453) ------------ ------------ ------------ ------------ NET LOSS $ (581,394) $ (514,672) $(2,536,598) $(3,252,869) ============ ============ ============ ============ BASIC & DILUTED LOSS PER SHARE $ (0.03) $ (0.04) $ (0.15) $ (0.24) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 20,154,173 14,192,731 17,025,694 13,653,348 ============ ============ ============ ============

F-2

DESERT HEALTH PRODUCTS, INC CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (unaudited) Convertible Preferred Stock Common Stock Treasury Stock ------------------------------------ --------------------------- ------------------- Shares Par Value Shares Par Value Shares Cost ----------------------- ----------- ------------- ------------ ------- ---------- Balances, December 31, 2004 3,359,125 3,360 15,663,821 15,664 425,000 (191,250) Shares cancelled for the nine months ended September 30, 2005: (750,000) (750) - - Shares issued for the nine months ended September 30, 2005: Loan inducement - - 275,000 275 - - Services and fees - - 5,300,000 5,300 - - Stock conversion (40,000) (40) 40,000 40 - - Stock subscribed - issued - - 404,700 405 - - Stock subscribed - - - - - - Net loss for the nine months ended September 30, 2005 - - - - - - ----------------------- ----------- ------------- ------------ ------- ---------- Balances, September 30, 2005 3,319,125 $ 3,320 20,933,521 $ 20,934 425,000 $(191,250) ======================= =========== ============= ============ ======= ========== Additional paid- Stock Accumulated Total Equity in Capital Subscribed Deficit (Deficit) ----------------------- ----------- ------------- ------------ Balances, December 31, 2004 8,758,124 404,881 (13,311,483) (4,320,704) Shares cancelled for the nine months ended September 30, 2005: 750 - Shares issued for the nine months ended September 30, 2005: Loan inducement 51,975 - - 52,250 Services and fees 1,219,950 - - 1,225,250 Stock conversion - - - - Stock subscribed - issued 219,976 (220,381) - - Stock subscribed - 82,440 - 82,440 Net loss for the nine months ended September 30, 2005 - - (2,536,598) (2,536,598) ----------------------- ----------- ------------- ------------ Balances, September 30, 2005 $ 10,250,775 $ 266,940 $(15,848,081) $(5,497,362) ======================= =========== ============= ============

F-3

DESERT HEALTH PRODUCTS, INC CONSOLIDATED STATEMENTS OF CASH FLOW For The Nine Months Ended September 30, (Unaudited) 2005 2004 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Loss from operations $(2,536,598) $(3,252,869) Adjustments to reconcile net loss to net cash in operating activities: Depreciation 52,185 14,062 Preferred Stock issued for interest payment - 124,094 Shares issued for financing costs 255,794 410,731 Impairment of intangibles and goodwill - 990,467 Stock issued for services and fees 1,225,250 443,000 Bad debt expense 37,199 - Other (6,853) - Change in: Accounts receivable (37,210) (9,631) Inventory (5,685) 11,852 Prepaid expenses 7,500 (7,500) Accounts payable 122,876 185,568 Deferred revenue 18,372 (5,481) Bank overdraft 8,858 - Interest payable 290,917 134,303 ------------ ------------ Net Cash Used in Operating Activities (567,395) (961,404) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of intangibles - (3,442) Deposits 1,250 ------------ Net Cash Used in Investing Activities - (2,192) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable 315,000 421,400 Proceeds from advances 194,536 - Increase in paid in capital - 17,325 Payments on notes payable (16,000) (38,659) Payments on advances - (1,000) Proceeds from sale of stock - 185,000 Cash received for unissued shares 75,000 368,110 ------------ ------------ Net Cash Provided by Financing Activities 568,536 952,176 ------------ ------------ Net Decrease in Cash and Cash Equivalents 1,141 (11,420) BEGINNING CASH AND CASH EQUIVALENTS 2,135 11,420 ------------ ------------ ENDING CASH AND CASH EQUIVALENTS $ 3,276 $ - ============ ============

F-4 Notes to Financial Statements Note 1. Summary Of Significant Accounting Policies Basis of Presentation and Interim Consolidated Financial Statements The accompanying unaudited condensed consolidated balance sheet as of September 30, 2005 and the related unaudited condensed consolidated statements of operations, stockholders' deficit and cash flows for the nine months ended September 30, 2005 and 2004 presented herein have been prepared in accordance with accounting principles ("GAAP") generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-QSB. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In our opinion, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of such condensed consolidated financial statements. Such necessary adjustments consist of normal recurring items and the elimination of all significant intercompany balances and transactions. These interim condensed consolidated financial statements should be read in conjunction with Desert Health's December 31, 2004, Annual Report on Form 10-KSB. Interim results are not necessarily indicative of results for a full year. Certain reclassifications have been made to conform prior period financials to the presentation in the current reporting period. The reclassifications had no effect on net loss. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Stock Based Compensation Desert Health has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and the related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded. Desert Health has adopted the disclosure-only provision of Statement of Financial accounting Standards No. 123., "Account for Stock Based Compensation". Desert Health has no issuances of stock options for the periods presented and, as such has no pro forma earnings per share presentation. Note 2. New Financing During the nine months ended September 30, 2005, Desert Health obtained new short term financing from individuals in the total amount of $315,000 bearing interest at 7% APR to 20% APR. During the nine months ended September 30, 2005, Desert Health received advances from individuals in the amount of $194,536. Note 3. Stock Issuances On May 2, 2005, Desert Health established the 2005 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan. Under the Plan, Desert Health is authorized to issue up to a maximum of 6,000,000 shares of common stock. During the nine months ended September 30, 2005, the Desert Health issued 5,300,000 common shares to consultants for professional services valued at $1,225,250. 3 Desert Health also issued 275,000 common shares to debt holders as loan inducements valued at $52,250 and has not issued 62,000 shares valued at $7,440 for loan expenses. Desert Health also received $75,000 for 500,000 common shares not yet issued as of September 30, 2005. Note 4. Subsequent Events Subsequent to September 30, 2005, Desert Health issued 550,000 shares to consultants for professional services valued at approximately $60,500. At a stockholders meeting on October 26, 2005, shareholders authorized the proposal of management to amend the Articles of Incorporation of Desert Health to increase the number of common shares authorized from 25,000,000 to 100,000,000. In October 2005, there were 3,875,000 shares cancelled due to a breach of an agreement. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context otherwise requires, the terms "Desert Health", "Company", "we", "us" and "our" in this Quarterly Report on Form 10-QSB refer to Desert Health Products, Inc., an Arizona corporation. The following discussion and analysis should be read in conjunction with our Financial Statements and the notes thereto appearing elsewhere in this document. Cautionary Statement Regarding Forward-looking Statements Our Annual Report on Form 10-KSB, this or any other quarterly reports on Form 10-QSB filed by us or any other written or oral statements made by or on our behalf may include forward-looking statements which reflect our current views with respect to future events and financial performance. The words "believe", "expect", "anticipate", "intends", "estimate", "forecast", "project" and similar expressions identify forward-looking statements. We wish to caution investors that any forward-looking statements made by or on our behalf are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to the Risk Factors which have been discussed in prior filings with the Securities and Exchange Commission ("SEC"). The following factors, among others, could cause actual results to differ from those indicated in the forward-looking statements: o The gain or loss of significant customers or significant changes in purchasing volume; o The amount and timing of our operating expenses and capital expenditures; o Changes in the volume of our product sales and pricing concessions on volume sales; o The timing, rescheduling or cancellation of customer orders; o The varying length of our sales cycles; o Our ability to specify, develop, complete, introduce and market new products and bring them to volume production in a timely manner; o The rate of adoption and acceptance of new industry standards in our target markets; 4 o The effectiveness of our product cost reduction efforts and those of our suppliers; o Changes in the mix of products we sell; o Changes in the average selling prices of our products; and o The risk factors described in other documents and reports filed with the SEC, including our Annual Report on Form 10-KSB for the year ended December 31, 2004. Though we have attempted to list comprehensively these important factors, we wish to caution investors that other factors could in the future prove to be important in affecting our results of operations. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Investors are further cautioned not to place undue reliance on such forward-looking statements as they speak only of our views as of the date the statement was made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW We are engaged in the packaging, sale and distribution of branded and store brand (private label) vitamins, nutritional supplements, skin care and animal care products. We have focused our marketing and registration efforts primarily in the foreign marketplace. This is a very time consuming and expensive project, but the nutraceutical and nutritional supplement market is growing at a faster pace internationally than the domestic market. One of the many rewards of having customers in the international market is that once the registrations are in place, the customer becomes a partner in developing that market in the long-term. However, we are taking steps to offer our products to mid-size chain store operations as an initial step towards penetrating the domestic market. We market over 100 products, which are packaged under various labels and bottle counts. They are sold in Vitamin and Mineral combinations, Chinese Herbal Products, Specialty Supplements, Weight Management Products, Herbal/Botanical Products, FemAid Product Support Systems, Ayurvedic Products, Skin Care Products, Pet Care Products, and Water Purification Products. We have traditionally outsourced our raw materials manufacturing. On January 26, 2000, pursuant to an Acquisition Agreement and Plan of Merger entered into by and between Desert Health and Intercontinental Capital Fund, Inc., ("Intercontinental"), a Nevada corporation (a company subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended) all of the outstanding shares of common stock of Intercontinental were exchanged for 400,000 shares of Rule 144 restricted common stock of Desert Health, in a transaction in which Desert Health was the successor and took on the reporting requirements of Intercontinental. CRITICAL ACCOUNTING POLICIES This summary of critical accounting policies is presented to assist in understanding our financial statements. The financial statements and notes are representations of our management who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principals and have been consistently applied in the preparation of the financial statements. 5 Basis of Consolidation The consolidated financial statements include the accounts of Royal Products, Inc., a wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated in the consolidation. Depreciation Depreciation is computed by using the straight-line method for financial reporting purposes and the accelerated cost recovery method for federal income tax purposes Revenue and Cost Recognition Revenues are recognized when earned, and expenses are recognized when incurred. We generally recognize revenue upon shipment of our products in accordance with the terms and conditions of firm orders placed with us by our customers RESULTS OF OPERATIONS. Three months ended September 30, 2005 and 2004 Revenues. Revenues for the three months ended September 30, 2005 were $14,694, a decrease of $77,063 or 84%, from $91,757 for the three months ended September 30, 2004. This decrease is principally attributable to the stopping of funding by a major investor in the fourth quarter of 2004. This funding was partially for support of Desert Health's sales projects that were in place for 2005. Other funding sources are being pursued. There has been increased acceptance of our registrations in the foreign markets and continuing penetration into the domestic market. We are expecting the results of these efforts to come to fruition in the fourth quarter 2005 and in 2006. We are continuing our efforts to launch new distribution outlets in Europe, Asia and in the domestic market. Gross Profit Margin. Gross profit was $5,210 or 35% for the three months ended September 30, 2005, a decrease of $26,817 or 84%, from $32,027 or 35% for the three months ended September 30, 2004. This decrease is primarily the result reduced sales for the quarter. - Operating Expenses. Operating expenses for the three months ended September 30, 2005 were $347,618, a decrease of $7,120 or 2%, from $354,738 for the three months ended September 30, 2004. Interest Expense. Interest expense for the three months ended September 30, 2005 was $240,839 an increase of $48,878 or 25%, from $191,961 for the three months ended September 30, 2004. The increase is primarily the result of accruing additional interest and principle as a result of a court ruling. Net Income (Loss). Net loss was $581,394 for the three months ended September 30, 2005, as compared to a net loss of $514,672 for the three months ended September 30, 2004. This increase is primarily the result of decreased sales as discussed in the revenue section Nine Months Ended September 30, 2005 and 2004 Revenues. Revenues for the nine months ended September 30, 2005 were $99,890, a decrease of $110,681, or 53% decrease from $210,571 for the nine months ended September 30, 2004. This decrease is principally attributable to the stopping of funding by a major investor in the fourth quarter of 2004. This funding was partially for support of Desert Health's sales projects that were in place for 2005. Other funding sources are being pursued. There has been increased acceptance of our registrations in the foreign markets and continuing penetration into the domestic market. We are expecting the results of these efforts to come to fruition in the fourth quarter 2005 and in 2006. We are continuing our efforts to launch new distribution outlets in Europe, Asia and in the domestic market. 6 Gross Profit Margin. Gross profit was $30,668 or 31%, for the nine months ended September 30, 2005, a decrease of $59,643 or 66% from $90,311 or 43%, for the nine months ended September 30, 2004. This decrease is primarily the result of decreased sales in the first and third quarters and costs associated with distribution of marketing samples. - Operating Expenses. Operating expenses for the nine months ended September 30, 2005 were $2,004,012, a decrease of $321,715 or 14% from $2,325,727 for the nine months ended September 30, 2004. In 2004 approximately $1,000,000 of operating expenses were the result of the complete write-off of intangibles to comply with generally accepted accounting principles. Interest Expense. Interest expense for the nine months ended September 30, 2005, was $570,107 a decrease of $455,999, or 44%, from $1,026,106 for the nine months ended September 30, 2004. The difference is primarily the result of decreased levels of deferred financing costs and decreased levels of loan inducement fees. Net Income (Loss). Net loss was $2,536,598 for the nine months ended September 30, 2005, as compared to a net loss of $3,252,869 for the nine months ended September 30, 2004. This decrease is primarily the result of the matters discussed in the Revenue, Operating Expenses and the Interest Expense sections above. Liquidity and Capital Resources As indicated in our attached financial statements, our gross revenue was not sufficient to meet our operating expenses for the nine months ended September 30, 2005. In addition, as of September 30, 2005, our current liabilities exceeded our current assets by $4,184,587 as compared to $2,786,298 for the comparable three month period ended September 30, 2004. Since inception, we have financed our cash flow requirements through debt financing, issuance of common stock for cash and services, and minimal cash balances. As we continue our marketing activities in Europe, China and North America, we will continue to experience net negative cash flows from operations, pending receipt of sales revenues, and will be required to obtain additional financing to fund operations through common and preferred stock offerings and bank borrowings to the extent necessary to provide working capital. Over the next 12 months, we intend to increase our revenues by releasing new products under development to our target markets. We believe that existing capital and anticipated funds from operations will not be sufficient to sustain operations and planned expansion in the next 12 months. Consequently, we will be required to seek additional capital in the future to fund growth and expansion through additional equity or debt financing or credit facilities. Considering the state of market conditions, no assurance can be made that such financing would be available, and if available it may take either the form of debt, equity, or a combination thereof. The down turn in the capital market will substantially impact our ability to sell securities in planned amounts and in turn our ability to meet our capital requirements. In either case, the financing could have a negative impact on our financial condition and our stockholders. A fast growing segment of the over fifty billion dollar U.S. nutritional supplement market is being reached through the use of infomercials. Thus, we have entered into a joint venture to participate in this form of marketing with our new Celadrin Pain Management System, our Foot Care skin care system, and our doctor tested and approved anti-aging products. These items are also being offered to private label customers. During fourth quarter 2005, we are continuing to develop Royal Products, Inc., a wholly owned subsidiary, which promotes sales in the network marketing arena. Desert Health is negotiating for new management to develop Royal Products into an into an international direct selling company. According to a report in the July 2005 Direct Selling News magazine the direct sales industry's sales volume on a global basis exceeded a record-setting $93 billion in 2004. We believe that Royal Products will become a major factor in Desert Health's business progress in 2006. Interest in this form of product sales is increasing 7 as can be seen by the success of major network marketing companies such as Forever Living, Herbalife, Shaklee and others. There is increasing interest in our product lines from the international markets. We have orders from our Middle East and United Kingdom customers and have renewed the lease for the coming year at our office in Beijing, China, and we are also becoming more aggressive in the domestic market. Management believes the implementation of events as described above will bring liquidity and profitability to the Company in the coming year. We believe exclusive marketing rights to the new health products, and other products being negotiated for, will bring significant volume and profitability. We will increase the number of our employees, and expand our facilities where necessary to meet product development and completion deadlines. We believe that existing capital and anticipated funds from operations will not be sufficient to sustain operations and planned expansion in the next 12 months. Consequently, we will be required to seek additional capital in the future to fund growth and expansion through additional equity or debt financing or credit facilities. Considering the state of market conditions, no assurance can be made that such financing would be available, and if available it may take either the form of debt, equity, or a combination thereof. A down turn in the capital market will substantially impact our ability to sell securities in planned amounts and in turn our ability to meet our capital requirements. In either case, the financing could have a negative impact on our financial condition and that of our shareholders. RECENT DEVELOPMENTS In October 2005, we received another order for immediate delivery from one of our major customers for $25,850, and an additional order of another product for $48,000 for delivery in the first quarter of 2006. This customer has advised us that their market is expanding and they intend to add three to five new products from our product lines within the next two years. On September 28, 2005, we signed a contract with Military Resale Group, Inc. (OTC:MYRG) a regional marketer and distributor of food and consumer goods to the military, giving them the exclusive rights for the distribution of our complete line of health and wellness products to all branches of the U.S. Government. MYRG can sell our products to the Army, Air Force, Marines, Navy, Coast Guard, Department of Defense, AAFES, the Defense Commissary System and the Army Air force Exchange System. Joanne Cavanagh, H.N.T., A.H.G. will begin a special training and education program of MYRG personnel in January 2006. May 3, 2005, we issued a press release announcing that we have entered into an agreement with Wilkerson Creative, Inc., a producer of Direct Response Radio, TV Commercials and Infomercials. Wilkerson Creative, Inc., has agreed to create direct response radio and television commercials as well as radio and television infomercials and to enter into arrangements with entities to cause such commercials and infomercials to be aired. Additionally, we believe that Wilkerson Creative, Inc. will provide the necessary talent to contribute to the success of these projects. The first of three infomercials scheduled for airtime will focus on Desert Health's Celadrin -based pain and joint support products. With recent disclosures by the FDA concerning some pharmaceutical medications for arthritis and pain relief either being removed from the market, or warnings being posted, this natural pain relief product is being released in timely fashion. Over 70 million individuals in the U.S. have arthritis. The Arthritis Foundation reports that arthritis is the leading disability of Americans, resulting in over 39 million medical visits per year and $65 billion dollars annually in medical expenses and lost wages. The second scheduled set of media attention through Wilkerson Creative, Inc., will concentrate on Desert Health's Anti-Aging Cream. Clinical studies conducted by dermatologist, Dr. Eugene Conte, concluded that patients responded to treatment with remarkable skin improvement and consumer approval. The last set of media scheduled for completion by Wilkerson Creative, Inc., will focus on Desert Health's Foot and Body Care system. This skin care system was designed 8 specifically to treat the dry skin and other conditions often associated with diabetes. Unlike most exfoliation processes, this system is non-irritating, yet highly effective .The following actions apply to this skin care system: Cleanser; Incredible exfoliant; Antixoidant; Enhances natural skin repair; Potent invigorator; Fantastic moisturizer. Rayfield Wright continues to be a supportive member of the quest for optimal health through Wright's Sports and Nutrition's line of natural health supplements. These supplement and skin care lines were designed and formulated exclusively by Desert Health Products, Inc., for Wright's Sports and Nutrition, LLC. The website address for Desert Health Products, Inc. is www.deserthealth.com - ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of September 30, 2005, our Chief Executive Officer, or "CEO", and Chief Financial Officer, or "CFO", performed an evaluation of the effectiveness and the operation of our disclosure controls and procedures as defined in Rules 13a - 15 (e) or 15d-15 (e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2005. CHANGES IN INTERNAL CONTROLS There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended September 30, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Nicholas M. Simak and NMS Solutions Group, Inc., filed a complaint in Maricopa County Superior Court of the State of Arizona against the Company on May 11, 2004, alleging non-payment of various loans. This case had been consolidated with a suit filed June 2, 2002 in the Maricopa County Superior Court in the state of Arizona by a plaintiff holding an assignment of a note in the amount of $50,000 from Nicholas M. Simak/NMS Solutions Group, Inc. It is the company's position the note was repaid with issuance of stock in 2000. Through the litigation process Desert Health won nine and lost seven of the claims. It is currently in process waiting for findings of fact and conclusions of law and a judgment. Please see our Annual Report filed on Form 10-KSB for the period ended December 31, 2004, and our quarterly Reports filed on Form 8-KSB for the periods ended March 31, 2005 and June 30, 2005 respectively, for discussion of pending legal proceedings. ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS BY THE COMPANY UPON ITS SENIOR SECURITIES None. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS (a) Exhibits Registrant is filing the following exhibits: 31.1. Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-B, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2. Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-B, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1. Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2. Certification of Chief Financial Officer pursuant to 18 U.S.D. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DESERT HEALTH PRODUCTS, INC. (Registrant) By: /s/ Johnny Shannon November 14, 2005 ------------------ Johnny Shannon, President By: /s/ Johnny Shannon November 14, 2005 ------------------ Johnny Shannon, Chief Financial Officer 10